New FHA Guidance Will Require Second Appraisal On Some HECMs

As part of its ongoing efforts to reduce risks to the Mutual Mortgage Insurance Fund (MMIF) and protect the health of the Home Equity Conversion Mortgage program, the Federal Housing Administration announced today that it will require lenders to provide a second property appraisal in cases where FHA determines there may be inflated property valuations.

Mortgagee Letter (ML) 2018-06, Home Equity Conversion Mortgage (HECM) Program — Changes to Appraisal Submission and Assessment for All HECM Originations specifies that FHA will perform risk assessments of all appraisals for case numbers assigned on or after October 1, 2018. Based on the outcome of that assessment, FHA may require a second appraisal be obtained prior to approving the reverse mortgage for insurance endorsement. Under the new policy, mortgagees must not approve or close a HECM before FHA has performed the collateral risk assessment and, if required, a second appraisal is obtained.

If FHA communicates that a second appraisal is required, the mortgagee must use the lower of the two appraisal values to underwrite the loan. The cost of the second appraisal, if required, is then eligible to be financed as part of the HECM closing costs.

This policy becomes effective for all HECM originations with FHA case numbers assigned on or after October 1, 2018, through September 30, 2019. FHA will renew the requirements beyond Fiscal Year 2019 pending an evaluation of these program changes at 6 and 9 months to determine if the goals of the guidance have been met.

ML 2018-06 also describes the interim procedures that will be in place beginning October 1, until the fully automated protocols become operational on or before December 1, 2018. If the automated protocols are in place prior to December 1, FHA will communicate this updated information to its stakeholders through its standard communications channels.

“This is a step that has become necessary due to HUD’s analysis of appraisals on properties subject to a HECM,” said Peter Bell, President and CEO, National Reverse Mortgage Lenders Association. “It is a logical step to address the concerns they’ve identified. We appreciate that they’ve chosen to implement this, while avoiding any decrease in Principal Limit Factors or increase in Mortgage Insurance Premiums.”

NRMLA will discuss Mortgagee Letter 2018-06 in greater detail and what it means for your businesses at the Annual Meeting & Expo in San Diego, October 28-30. Stay tunes for further updates.